Why Economists Should Care About Inequality, with Branko Milanovic

Episode Summary

Executive Summary: At Aspen, Branko Milanović argues that capitalism is not disappearing but mutating: inequality remains central to growth, politics, and legitimacy; global gains have lifted China and the world’s top earners while squeezing middle classes in rich countries; and the next system may combine domestic market liberalism with external mercantilism. The discussion weighs redistribution vs pre-distribution, democracy vs performance, and whether capitalism can remain fair without major political and institutional change.

Main Topics: Why inequality matters for growth and legitimacy (Priority: 5/5): Milanović argues inequality is not just a moral issue; within a normal range, lower inequality can support higher growth and social stability, echoing Adam Smith’s warning about poor and miserable majorities. Why inequality disappeared from economics and came back (Priority: 5/5): He cites three causes: economics’ turn toward general equilibrium and prices, political pressure in Cold War-era discourse, and wealthy-funded institutions that prefer 'poverty' to 'inequality' because the latter implies structural change. Global vs national inequality (Priority: 5/5): The conversation distinguishes global inequality from inequality within nation-states. Milanović says national inequality matters more politically because citizens can act on it, but global shifts still shape domestic anger and instability. The elephant curve and globalization’s winners and losers (Priority: 5/5): He explains the famous elephant chart: high gains for urban China and the global top 1%, but stagnation for middle-income workers in rich countries, illustrating how globalization redistributed income and fueled backlash. Capitalism, state intervention, and the limits of redistribution (Priority: 5/5): Milanović says state intervention is necessary, but he doubts big redistributive reforms are politically sustainable. He instead emphasizes pre-distribution: spreading assets, capital ownership, shares, and education before market outcomes harden. Democracy, capitalism, and meritocracy (Priority: 4/5): He questions a strong necessary link between capitalism and democracy, arguing many capitalist takeoffs occurred under authoritarian or oligarchic systems, and suggesting societies may tolerate a growth-versus-democracy trade-off. Future ideology: domestic liberalism and external mercantilism (Priority: 4/5): Milanović predicts a post-neoliberal world in rich countries where domestic markets remain relatively liberal but international policy becomes more mercantilist and geopolitical, reflecting the collapse of both socialism and neoliberalism as universal ideologies.

Key Arguments: Inequality matters because it can raise growth and definitely affects social cohesion and political stability. The study of inequality faded because economics narrowed its focus to prices and equilibrium, political language avoided class, and elites dislike the term 'inequality.' National inequality is more actionable than global inequality because citizens have institutions and political rights to influence outcomes. Globalization created a large divergence in winners: urban China and top global earners surged, while middle classes in rich countries stalled. China’s rise can be seen both as a success in global poverty reduction and as a source of geopolitical tension and domestic resentment in wealthy states. Redistribution alone is reaching political limits; pre-distribution is more promising because it changes endowments before inequality becomes entrenched. COVID showed the state can strongly reduce inequality when it chooses to intervene aggressively through transfers and taxes. Capitalism and democracy are not inherently inseparable; history shows capitalist growth can occur under hierarchical or authoritarian systems. If capital income becomes more concentrated and AI increases capital’s share of GDP, inequality could intensify sharply unless ownership broadens. The emerging system may be 'national market liberalism': freer domestic markets paired with more protectionist or mercantilist external policies.

Data Points: Inequality discussion timeframe: 15 years - Referenced as the period during which policy debates about inequality have produced limited change. US share of top 5% global income: 40% - Milanović notes Americans comprise about 40% of the global top 5%. China’s growth during globalization: 8% to 10% per annum - Used to explain the upward slope of the elephant curve for urban China and the global middle. Growth of stagnant global middle: 0% to 1% annually - Describes the income growth of people around the 70th-80th percentile, largely middle classes in rich countries. China vs US GDP (PPP): China overtook the US by 2015 - Used to illustrate why country-level convergence can trigger geopolitical friction even if it lowers global inequality. China vs US GDP (market exchange rates): About 30% below the US - Shows that China had not fully caught up in exchange-rate terms even after surpassing the US in PPP terms. US Gini change during COVID before government action: +1.5 Gini points - Market income inequality rose sharply before transfers and taxes were applied. US Gini change during COVID after government action: -1.5 Gini points - Government intervention reversed the market-income rise. US COVID fiscal response: 15% to 18% of GDP - Size of CARES Act and related support cited as evidence of state power. Cash income from capital for Americans: 60% receive zero or trivial amounts - Used to argue that capital income is highly concentrated. Median cash income from financial assets: $22 per year per person - Illustrates extreme concentration of capital income in the US. Top 10% with both high labor and capital income: About one-third - Milanović’s concept of homoplutea: the richest are increasingly both top workers and top capital owners.

Pivotal Quotes: "No society can surely be flourishing and happy of which the far greater part of its members are poor and miserable." — Adam Smith (quoted by Branko Milanović): Used to frame the moral and economic importance of inequality. "I think in order to preserve democracy, one has to have a variety of voices being heard, and the variety of voices has to be expressed also through the political arena." — Branko Milanović: His answer to what capitalists should do to preserve democracy. "I think there has to be an intervention by the state." — Branko Milanović: His view on whether capitalism can self-correct inequality without government action.

Implications: The episode suggests future capitalism will likely require broader asset ownership, stronger democratic safeguards, and more restraint on money in politics. Without that, inequality, backlash, and geopolitical rivalry may deepen even if growth continues.